RIGA/VILNIUS, Nov 21 (Reuters) - Regulators in Latvia halted operations at mid-sized bank Latvijas Krajbanka on Monday after the bank’s parent was seized by the state last week in neighbouring Lithuania amid allegations of fraud.

The actions are the most serious problems for the banking sector in the Baltic region after Latvia in 2008 had to rescue its second-largest bank. Latvia subsequently needed a bailout led by the International Monetary Fund and European Union.

Lithuania last week took over Krajbanka’s 68-percent owner, Snoras Bank, saying it had found a hole in Snoras’ assets worth about 300 million euros ($404 million). Prosecutors are investigating alleged fraud.

In Latvia, the FKTK supervisor said it had found funds missing at the bank, the 10th-largest by assets and sixth-largest by deposits.

It said it fired the bank’s board and that the FKTK’s deputy head would lead a group of authorised representatives. It also informed the general prosecutor’s office about the shortfall of funds.

A former senior manager at Krajbanka, Dzintars Pelcbergs, told Latvian television that the bank had been surprised by the FKTK decision and that management had no idea about any shortage of funds. “Otherwise (if it had known), the bank’s management would immediately have acted,” he said.

Snoras was owned by Russian businessman Vladimir Antonov. He and his Lithuanian partner in Snoras have criticised Lithuania for nationalising the bank, calling it robbery, and have threatened legal action. They have denied any wrongdoing.

DEEPER SNORAS PROBLEMS

In Lithuania, the government and central bank on Monday delayed making a decision on renewing some operations at Snoras.

“As far as I understand, the situation discovered at Snoras is more complicated than previously thought,” Lithuanian Prime Minister Andrius Kubilius told reporters. “The investigation will reveal how much this bank was a responsible commercial bank, and how much it was sometimes just a machine for handling shady financial transactions,” he said.

Lithuania has said the country would not need to inject taxpayer money unless the shortfall exceeded 1.5 billion euros.

The former owners, Antonov, who previously had tried to become an investor in struggling car maker Saab SWAN.AS but was blocked by the European Investment Bank, and Lithuanian partner Raimondas Baranauskas, criticised what they said was the government’s “illegal takeover.”

“We declare our intention to use all the legal means at our disposal to defend our business and support private business in Lithuania,” they wrote in the Telegraf newspaper, a daily published in Russian in Latvia.

The bank sectors of the Baltic states are dominated by Nordic banks such as Swedbank, (SWEDa.ST) SEB (SEBa.ST) and Nordea NDA.ST. Snoras and Krajbanka were among the main banks owned by non-Nordic investors. ($1 = 2.553 Lithuanian Litas)